USPS is testing a bar-code system to let customers track letters and packages along every step of the delivery path, in an effort to make ordinary mail as valuable as UPS, FedEx, and even e-mail.

If the U.S. Postal Service has its way, "the check is in the mail" excuse will no longer be valid. The company that sent you the bill could verify whether you're bluffing through a bar code on the return envelope scanned by the Postal Service.

That tracking system, which starts this month, is one way the Postal Service is making first-class mail such as bills and personal correspondence more valuable, in a world full of e-mail and electronic documents. Meanwhile, the red, white and blue may just become a serious competitor to brownUnited Parcel Servicein small-package delivery.

The Postal Service says a financial institution will test the system in July by using the new bar code. The customer will track mail as it winds through the Postal Service's 283 processing and distribution centers across the country. Currently, mail is mostly scanned at the beginning and delivery points.

By year's end, all letter mail could be tracked at Postal Service facilities. The Postal Service will add commercial customers throughout 2006.

The Postal Service plans to win favor with large first-class mailersgroups such as financial institutions that send bills, customer correspondence and statements. Such customers send 50 billion pieces of mail a year. But the bar-coding tracking system is just one way the USPS is winning customers as it carries out a transformation plan launched in 2002. The Postal Service has:

Revamped its Web site to become an e-commerce portal, now serving 2.2 million visitors a day.

Introduced new services such as Click-N-Ship, an online postage printing service, to generate more than $200 million in revenue.

Created better mail tracking through a service called Confirm, which allows business customers to follow mail through the Postal Service's automated systems.

"There's a lot of interest in making first-class mail more intelligent," says Charlie Bravo, senior vice president of intelligent mail and address quality at the Postal Service.

The core of that campaign is the bar-code tracking system. Here's how it would work.

A direct marketer, such as Williams-Sonoma, would know when you received a catalog with 99% accuracy, because each piece would be scanned before it hit a mail deliverer's bag. A utility company would reduce phone costsand annoyed customersif it could verify on a USPS-run Web site that your check was indeed in the mail. A credit card company, such as MBNA, could bring in additional clerks when it saw an unusual spike in payments on the way.

In many respects, the Postal Service is catching up to the techniques pioneered by Federal Express with packages. It's also a defense strategy. The Postal Service, which has a monopoly in mail, has to make first-class mail more relevant since it accounts for more than half of the organization's $69 billion in annual revenue.

Kate Siggerud, director of physical infrastructure issues at the Government Accountability Office, says first-class mail is one of the Postal Service's biggest challenges. In 2004, first-class mail volume fell 1.1%, the third consecutive annual decline.

So far, the Postal Service has weathered the declines by boosting efficiency. According to the GAO, the Postal Service's productivity increased 5.2% from fiscal 2001 to 2004 as it cut costs and work hours. The Postal Service, which has 707,000 employees, down 9.4% from 2001, cut debt to $1.8 billion for the year ended Sept. 30, 2004, down from $11.3 billion in 2001. Operating margin was 4.6% for fiscal 2004, up from 1.8% in 2002. The technology campaign also helped: Consolidating systems saves $100 million a year.

Still, the Postal Service has challenges. Its facilities, compiled over decades, often don't share common equipment, specifications and processes. That means the Postal Service can't replicate the productivity of a company like Wal-Mart, which builds nearly identical distribution centers. It doesn't own its transportation network and is saddled with excess capacity. The cumulative effect is that the service can become more efficient, but may hit a productivity wall given its infrastructure and high pension costs, Siggerud says.

"[The Postal Service has] been making some noticeable improvements four years in a row," she says. "They're on the right track, but still have more to do."

Small steps

Nevertheless, the Postal Service has come far enough that it can't be dismissed. In a June 9 report, Morgan Stanley analyst James Valentine says the Postal Service is a viable threat to United Parcel Service for shipping small packages from businesses to consumers.

"The U.S. Postal Service is often overlooked as a competitive threat to UPS, but we believe it's a force to be watched," Valentine says. "Its improved service is putting pressure on UPS' pricing where they compete."

The Postal Service competes with UPS on two fronts: overnight mail and delivering lightweight parcels such as books and music. Improved service along with steady prices since 2002 has made the Postal Service "all that more attractive to shippers," Valentine says.

However, getting to the point where it could compete meant the Postal Service had to update and consolidate its technology infrastructure, says USPS chief technology officer Bob Otto.

The Postal Service's first move was to standardize its personal computers and software for its 245,000 users to make maintenance easier. The organization also consolidated 15,000 Unix servers to about 1,200 to 1,500, saving $50 million a year. Application and network maintenance was consolidated in two computing centers in Eagan, Minn., and San Mateo, Calif., to save another $50 million annually.

The Postal Service also shared technology services across departments such as finance, human resources and help desk. Otto whittled 119 technology help desks to three. By centralizing finance operations, the Postal Service saved $60 million a year and cut 750 positions.

"We just accumulated a lot over the years," Otto explains. "In the last five years, we modernized everything."

Defending Its Turf

As Otto was cutting technology costs, Bravo in 2003 formed the engineering, marketing and technology groups that would make first-class mail more valuable to large mailers. Their mission: to create a bar-code system to accommodate all services, including Confirm, delivery confirmation and certified mail. Previously, the Postal Service created a new bar code every time a service was launched. The end result was as many as 30 types of bar codes.

Bravo needed to pack more information on bar codes so one system could account for multiple services and mail types like "flat" mail, which consists of items like magazines and newspapers. The group settled on a 31-digit bar code, up from the 9-digit code then in use, that could be easily printed on ink-jet and laser printers. The new code would require few software changes for most of the Postal Service's customers, which range from small businesses to credit card giants to non-profit organizations.

If the implementation is successful, customers will be able to get tracking information on any piece of mail.

Next up: Another transformation plan due in September to take the Postal Service to 2010. That plan will cover potential changes such as further automation of processing centers and retooling older facilities.

As Otto puts it: "By far, we're not done."

Business Editorldignan@ziffdavisenterprise.comLarry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.